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Ratio Scenario - Supreme Variable Franistats - Current ratio

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Scenario: Chase, Dan, and I stopped by the old watering hole for an attitude adjustment. The conversation turned to work. Over the past year, SVF (Supreme Variable Franistats) has realized an increase in our current ratio and a drop in total assets turnover ratio. Conversely, SVF's sales, quick ratio, and fixed assets turnover ratio have remained constant. We are arguing about what could cause this. What do you think?

The second part of the question is this: We will obviously want to know how to correct these downturns. How do we do it?

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Solution Summary

Your tutorial walks you through the logic of how to figure out what has changed and then offers two strategies for solving the issues. Two remedies offered. This is just an overview/summary (238 words or about two paragraphs).

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If Sales, quick ratio (Cash + ST Invt + AR/current liab) and fixed asset turnover (sales/fixed assets) have remained constant and total assets turnover and current ratio have dropped, here are the pieces that have dropped:

Current ratio is quick ratio without inventory in the numerator. Since current ratio is up but quick ratio is not, that means that ...

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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